India could well be the fastest-growing Asian economy in calendar year 2021 (CY21) if Nomura’s forecasts are to be believed. The foreign research and brokerage house expects the Indian economy – as measured by gross domestic product (GDP) – to grow at 9.9 per cent in 2021, eclipsing China (2021 GDP growth pegged at 9 per cent) and Singapore (at 7.5 per cent) during this period.
Nomura has turned positive on India’s cyclical outlook for 2021, and believes the country is on the cusp of a cyclical recovery. The change in stance comes after nearly two years (end-2018), when it had turned negative on India’s growth.
“We project GDP growth to remain in negative territory in Q1-2021 (- 1.2 per cent), pick up to 32.4 per cent in Q2 on base effects, before easing to 10.2 per cent in Q3 and 4.6 per cent in Q4. Overall, we expect GDP growth to average 9.9 per cent in 2021 versus -7.1 per cent in 2020, and 11.9 per cent in FY22 (year ending March 2022) versus -8.2 per cent in FY21,” wrote Sonal Varma, managing director and chief India economist at Nomura in a December 8 report titled Asia 2021 Outlook, co-authored with Aurodeep Nandi.
A sharper-than-expected rebound by India’s economy in the second quarter has taken most analysts by surprise. Fitch Ratings, for instance, now expects the GDP to contract at 9.4 per cent in the current financial year, down nearly 1 percentage point (pp) from 10.5 per cent forecast in September 2020.
Given the uncertainty surrounding the Covid-19 vaccine, Nomura expects the Reserve Bank of India (RBI) to maintain an accommodative stance in the first half of calendar year 2021 (H1- 2021) and a gradual withdrawal of liquidity in the first/second quarter (Q1/Q2) of 2021, shift to a neutral stance in Q2/Q3CY21, followed by higher policy rates in early 2022. It expects inflation to average at around 5.5 per cent in H1-2021, before easing to 4.1 per cent in the second half.
The fastest-growing tag in 2021, however, will come with its own challenges. A key concern in 2021 and beyond, Nomura said, is the implication of the K-shaped recovery seen till now. A slower pace of recovery in the informal sector, according to them, implies the cyclical recovery maybe a jobless recovery and can lead to lower per-capita income, higher inequality, pressure for more populist spending by the government and social tensions.
It also cautions against the structural balance sheet challenges, particularly elevated non-performing assets (NPAs) in the financial sector, constrained fiscal space and a corporate sector focused more on deleveraging than capex.
“Owing to the lack of job creation, the cycle’s durability could be on shaky ground. For 2021, however, we believe risks are skewed towards an upside surprise on both growth and inflation, relative to consensus and the RBI’s projections,” Varma and Nandi said.
A rise in infection cases due to crowding during recent festivals; fading of pent-up demand after the initial reflex; fiscal drag from expenditure compression in Q1, as the government struggles to keep the deficit under control; and weaker growth in Europe and the US due to the pandemic are the four risks it cites that could trigger a slowdown in economic growth going ahead.
At a macro level, Nomura expects global growth to pick up from negative 3.7 per cent in 2020 to 5.6 per cent in 2021, with growth in H1-2021 averaging around 7.8 per cent y-o-y (owing to base effect).